A Note from Joe

Your Top Two Topics for May

Thank you for trusting Gulf Coast as your resource when it comes to your clients’ charitable giving. We are honored to be your first stop for all things philanthropy. This month, we’re highlighting two important topics: charitable remainder trusts and moving a private foundation into a supporting organization or donor-advised fund.

As always, if you ever want to dig a little deeper into any of these strategies, please reach out.

Give us a call!

Your May Content

Keep this information in mind as you explore your May Newsletter.

- A charitable remainder trust (CRT) is a popular planning vehicle because your client is eligible for an up-front income tax deduction, a go-forward income stream, and deferral of capital gains taxes. Gulf Coast is happy to share a rundown of the what, where, who, why, when, and how of CRTs.

- As you work with a client who has established a private foundation, consider that at some point it might make sense to transfer all or a portion of the private foundation’s assets to a supporting organization or donor-advised fund at Gulf Coast. Our checklist for making a move is worth a skim to remind you of the many benefits.

THE FIVE W's (AND ONE H) OF CRTs:

Charitable Remainder Trusts - What, Where, Who, Why, When, and How?

If you've represented charitable families over the years, chances are a charitable remainder trust (CRT) has either been a valuable tool—or could become one—depending on their circumstances. CRTs offer several compelling tax advantages, particularly for clients undergoing a significant liquidity event.

Charitable Remainder Trusts (CRTs): A Rare but Valuable Planning Tool

For most attorneys, CPAs, and financial advisors, CRTs aren’t an everyday occurrence. In fact, according to 2023 tax data, there are fewer than 116,000 total trusts(@95,500 CRUTs and 20,200 CRATs) in the U.S. But I believe there would be many more if our industry better understood the unique value CRTs offer to donors.

While not appropriate for every situation, CRTs can be an exceptionally effective planning tool under the right circumstances. That’s why it’s worth having at least a basic understanding of how they work—and when they can make a meaningful difference.

WHAT is it? Your client establishes a CRT as a standalone trust. The trust pays an income stream to the client (and potentially other beneficiaries such as a spouse or children) for life or for a period of years not to exceed twenty. According to the trust’s terms, whatever assets are left when the income stream ends will pass to a charity, such as your client’s fund at Gulf Coast.

WHERE does the charitable deduction figure in? Because the transfer of assets to the CRT is irrevocable, your client may be eligible for an up-front charitable income tax deduction in the amount of the present value of the charity’s future interest, calculated according to IRS-prescribed rules and interest rates. Remember also that assets held in a CRT are excluded from your client’s estate for estate tax purposes.

WHO is it for? The ideal client to establish a CRT is typically someone who owns highly appreciated assets, including marketable securities, real estate, or closely-held business interests. That’s because a CRT allows these assets to be sold within the trust without triggering immediate capital gains taxes, enabling the proceeds to be reinvested.

WHY are some trusts called CRATs & CRUTs? A “charitable remainder annuity trust” (“CRAT”) is a type of CRT that distributes a fixed dollar amount each year to the income beneficiary. Your client cannot make additional contributions to a CRAT. A “charitable remainder unitrust”(“CRUT”), on the other hand, is a type of CRT that distributes a fixed percentage (at least 5%) annually based on the balance of the trust assets(revalued every year). Your client can make additional contributions to a CRUT during lifetime.

WHEN is a CGA a better fit? The tax laws permit a client over the age of 70 ½ to make a once-per-lifetime transfer from an IRA of up to $54,000 (2025 limit) to a CRT or other split-interest vehicle, such as a charitable gift annuity (CGA). This is sometimes called a “Legacy IRA.” Because the cost of setting up a CRT usually means that a $54,000 CRT is impractical, a client who wants to leverage the Legacy IRA opportunity may lean toward a CGA instead.

HOW can I learn more? As is the case with any question you encounter from a client about charitable giving techniques, Gulf Coast is honored to be your first call. We can help you navigate the options and identify strategies that are likely to best meet a client’s needs.

MAKING THE MOVE:

Private Foundation into a Supporting Organization or Donor-Advised Fund

The number of private foundations in the United States is nearing 150,000 with combined assets topping $1 trillion, so it’s no wonder that a lot of people immediately think about establishing a private foundation when they begin to explore structuring their charitable giving activities. You’re likely working with several clients who’ve established private foundations somewhere along the way.

Recently, though, the growth of donor-advised funds to nearly 2 million in number–with grants from these vehicles reaching $50 billion in some years–signals that many people are starting to use both a donor-advised fund and a private foundation. Some of your clients may even be considering transferring a private foundation’s assets to a donor-advised fund at Gulf Coast to carry out the family’s mission. This particular trend is on the rise, so take a moment to skim this checklist to help guide conversations.

"Reality check" the hassle. Day-to-day management and administration of a private foundation can become time-consuming, especially as the responsibilities fall to second- and third-generation family members. Even the first generation may realize at some point that administrative work is taking too much focus away from nonprofits, the community, and making grants.

Review the tax rules. The IRS’s rules related to investments, distributions, and “self-dealing” are complex. Over time, family members may become frustrated navigating the potholes of tax compliance. For instance, if a client plans to transfer all or part of a family business, now or in the future, it is critically important to communicate the benefits of using a supporting organization or donor-advised fund at the community foundation versus transferring the business interests to a private foundation (which can be disastrous from a tax standpoint).

Lean on Gulf Coast. Our team is happy to walk alongside you and your client through the steps to terminate a private foundation and move the assets to a supporting organization or donor-advised fund at Gulf Coast. The first step is for the board of the private foundation to approve the termination and capture that approval in meeting minutes or a consent of directors.

Set up a supporting organization or donor-advised fund. Your client can establish a supporting organization or donor-advised fund at Gulf Coast and choose the name (e.g., Smith Family Foundation Fund). Similarly, selection and succession of fund advisors (who will handle grantmaking) can mirror the private foundation’s board structure. As a result, the supporting organization or donor-advised fund will look and operate a lot like the private foundation. In fact, the supporting organization will more closely mirror the private foundation.

Make a grant. The private foundation will distribute (“grant”) most of its net assets to the newly-established fund. The private foundation will need to be sure it pays all of its liabilities and expenses before accounts are closed, so your clients will want to leave a reserve in the private foundation to cover final bills before completing the termination.

Finalize the termination. As long as the private foundation corporate entity is in good standing according to state laws, termination for tax purposes will be automatic and smooth because assets were transferred to Gulf Coast, a longstanding organization. The private foundation will then simply file an informational tax return with the Internal Revenue Service for its final year (even if it is a short tax year).The final step is for the private foundation to take any steps required for termination under the laws of any and all states in which it was registered, especially if the private foundation was organized in corporate form.

Whether your client is ready to transfer a private foundation this year or is simply evaluating options, please give us a call. We’re happy to help!

Your Resource.

As you serve your philanthropic clients, we strive to be your resource and sounding board. Understanding the charitable side of the equation allows us to serve as a secondary source for you as you manage the primary relationship with your clients.

Connect with us anytime! It’s our pleasure to work with you in partnership as you help your clients achieve their charitable giving goals for this year and many years beyond tomorrow.